The Gap Between Manufacturing and Non-Manufacturing Remains Wide

By | October 7, 2019

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.

Overview

Coffee and Economic Review

Global stocks were slightly higher on Friday, clawing back some ground lost in the worst week in months. Safe-haven assets rose ahead of a key job report as investors hoped this week’s dismal data would trigger more U.S. interest rate cuts. Trading was subdued on Friday after a bruising week for assets considered risker in times of economic and political stress. This followed a week of weak economic data that revealed a slowdown in U.S. manufacturing and services. The MSCI world equity index, which tracks shares in 47 countries, eked out a small gain on Friday, reversing earlier losses in Asia. The index was still on track for a 1.8% drop for the week, its worst in two months, hurt by a steady drumroll of weak economic data and political uncertainty in the United States, geopolitical tensions in the Middle East and Brexit.

Wall Street surged on Friday after a moderate jobs report in September offered relief from a spate of dismal economic data this week that rankled markets and fueled concerns that the largest economy may be heading for recession. The Labor Department reported that 136,000 jobs were created in September and the unemployment rate dropped to a 50-year low. After losing about 3% on Tuesday and Wednesday, the S&P logged its biggest one-day gain since Aug. 16 on Friday. For the week, the Dow lost 0.92% for a third week of declined and the S&P ended 0.33% lower, also a third week of declines.

The labor Department reported 136k new jobs in September, a slowdown in hiring but a steady increase that soothed fears of recession raised earlier in the week when the ISM manufacturing index fell sharply in September. The unemployment rate fell to 3.5%, a 50-year low. The report on the labor market was a jolt of good news, offsetting some of the negative news about manufacturing. Other labor market indicators such as job openings and hiring plans have rolled over and with no signs of demand improving, hiring should continue to slow. Average hourly earnings were basically flat. With demand for labor softening and any companies having to contend with higher input costs because of tariffs, we don’t see much push in wage acceleration in coming months.

The ISM manufacturing index fell to 47.8, below the 50 mark, meaning more industries are reporting a contraction than expansion. Despite decrease trade rhetoric last month, every subcomponent in the index is below 50 except supplier delivery. Manufacturing accounts for only 12% of output and an even smaller share of employment (8.5%), so how concerning is a manufacturing index below the 50 mark? The manufacturing sector slid into contraction territory in 2012 and 2015-16 without a recession. The ISM non-manufacturing index remains in positive territory but did stumble more than expected to 52.6, still well into expansion territory.

The gap between manufacturing and non-manufacturing remains wide. However, there are growing signs of weakness spreading and the risk of factory weakness spreading to the service sector may be greater than in the last scare of 2015-16. In that period, consumers got a boost from low commodity prices, which contrasts to today, when consumers are starting to see stronger inflation. Tariffs are pushing up process on key items and consumer may react to this jump in prices. Furthermore, income growth is likely to slow with a slower rate of job creation.  This is worrisome because consumers are the key engine of growth in the economy. With the economy slowing to 2%, any retrenchment in consumer confidence and spending could spell real trouble.

Next week will be light on the economic calendar. Both the PPI and CPI will be featured as well as import and export prices. Also, the small business optimism index will be released and wholesale trade.

Latest Data

The U.S. Economy:

Construction spending increased 0.1% in August after remaining unchanged in July. Residential construction spending increased 0.9% in August, following a 0.6% advance in July. Of the components of residential construction spending, the single-family sector advanced 1.4% m/m, but remained 6.6% from a year earlier. Spending on multi-family structures fell 0.9% but was up 2.8% year-over-year. Nonresidential construction spending fell 1.0% in August, following a 1.6% decline in July. Declines in power, commercial and healthcare structures out-weighed increased in office and highway and street structures. Nonresidential construction spending was down 2.8% y/y. Public construction increased 0.4% in August and was up 4.6% from a year earlier. The report suggests that low mortgage rates are boosting demand for single-family homes, but the nonresidential side is struggling as of late. Spending on commercial structures has been tough, but outlays are rising in warehousing and transportation, reflecting the impact of e-commerce. Public construction reached a high in April but has gained a little in the last two months.

The ISM manufacturing index headed in the wrong direction, as trade tensions continue to bite and its possible that the United Auto Workers strike also dinged the ISM. The index dropped from 49.1 in August to 47.8 in September, but it does remain above the recession threshold of 42.9. Production dropped from 49.5 to 47.3. Only three industries reported a gain in output, while 11 industries reported a decline in production. New orders inched higher to 47.3 in September, from 47.2 in August. Of the 18 industries, 3 reported growth in new orders, including miscellaneous manufacturing, food/beverage and chemical products. 11 industries reported a decline in new orders. The employment index fell from 47.4 in August to 46.3 in September. Four industries reported a gain in employment, while 11 reported a decline. The supplier deliveries index slipped from 51.4 in August to 51.1. Inventories dropped from 49.9 to 49.7. Prices paid increased from 46 in August to 49.7. New export orders fell from 43.3 to 41. Imports did rise 2.1 percentage points to 48.1.

Manufacturing is struggling and a quick turnaround is unlikely. The weakness in manufacturing reflects an inventory adjustment, slowing global growth and uncertainties surrounding trade policy. The UAW strike also may have impacted the index in September. Manufacturing output fell for two consecutive quarters in 2013, 2015 and 2016, but the economy wasn’t derailed. Manufacturing won’t lead to a recession unless large numbers of workers are laid-off and that affects confidence and spending.  There are still downside risks that manufacturing’s weakness could spread to the wider economy.

U.S. vehicle sales increased to an annual rate of 17.2 million in September, up from 17.1 million in August. Vehicle sales have now been above the average of 17 million for the first nine months of the year but came in 0.6% below 2018 numbers. The slowing U.S. economy is being driven by the strong consumer sector. Despite decent umbers, 2019 is shaping up to be the slowest year since 2014. New vehicle sales moved higher in the last few weeks of summer and the first week off fall. The numbers reflect the strength of the consumer. Consumer confidence is still high, but the Conference Board’s index has fallen three out of the last four months indicating that some cracks are beginning to appear. This could indicate a future gradual slowing in sales from the 17.0 million average down to 16.8.

The non-manufacturing sector remains in expansion mode, but the breadth of growth narrowed in September. The ISM non-manufacturing index fell from 56.4 in August to 52.6 in September. Details were weaker in general. The business activity index fell from 61.5 to 55.2. Of the businesses surveyed, 13 reported growth in business activity during the month. Education and other services saw a decline. The new orders index fell from 60.3 to 53.7. Four industries noted a contraction in new orders and 12 industries reported an increase. The employment index continued its decline, falling 2.7 points to 50.4. Anecdotes noted the tight labor market weighing in on hiring. The prices paid index increased from 58.2 to 60. Weaker growth in non-manufacturing is to be expected because the economy faces several headwinds. The trade war is raising input costs. The labor market is tightening. This does not mean a recession but a slower rate of chugging through.

Factory orders fell 0.1% in August, after two monthly increases. The latest numbers leave orders down 1.9% from a year ago. Transportation orders fell 0.4% and are down 8.4% from a year earlier. Factory shipments fell 0.1% for the month. Top-line shipments are down 0.3% from a year earlier. Core capital goods orders fell 0.4% after remaining unchanged in July. Orders in this segment are down 0.4% from a year earlier. Hard data for U.S. manufacturing continues to signal a broad industry slowdown. Both orders and shipments in the core capital goods sector are unencouraging. Core capital goods orders, a proxy for business investment didn’t increase for two consecutive months and have been on a down hill trend since 2017. A turnaround in the industrial sector is not expected any time soon.

Payrolls increased by 136,000 in September, a modest pace but growing enough to keep pace with labor force trends. Gains for the previous two months were revised upwards by 45,000 jobs. July and August growth improved by 168,000. The private sector added only 114,000 jobs, down from 122,000 in each of the previous two months. Manufacturing declined by 2,000 with a loss of 4,100 in motor vehicles. The GM strike did not start before after the end of the survey week. Retail payrolls continue their downside trend. Employment gains in the fastest growing sectors, education/healthcare and professional/business services were softer than in previous months. Census hiring did not juice the numbers. The 22,000 increase in the public sector came from state and local governments. Average hourly wages slipped by 1 cent in September. Year-over-year growth was 2.9%, below 3% for the first time this year. The unemployment rate fell to 3.5%, the lowest of the expansion. The participation rate was unchanged at 63.2%. Employment growth have slowed in recent months due to a slower economy and a tightening labor market. and that trend is likely to continue into the new year. Employment growth may be reduced to very low numbers just before the election next year.

The nominal trade deficit widened slightly in August, maintain trade’s drag on GDP growth in the third quarter. The deficit widened to $54.9 billion from $54 billion, as imports increased more than exports. Nominal exports edged up 0.2% following a 0.6% gain in July. Goods exports gained 0.3% on a monthly basis after rising 0.9% in July. Changes in goods exports were mixed. Food, feed and beverages rose 4.1% after sliding 1.8% in July. Industrial supplies added 3.4% following a 3.9% drop. Performance was weak in capital and consumer goods. Total nominal imports increased 0.5% after edging down 0.1% in July. Capital goods imports rebounded from consumer goods added to July’s 1.1% gain and rose 3.4% in August. om a 2.6% drop in July to add 3.4%. The deficit is being driven the still healthy U.S. economy and slowing growth overseas and the relatively strong U.S. dollar. The trade war is also contributing to slower growth and is undermining sentiment both at home and abroad. Consumer goods exports are down 4% from a year earlier. Consumer goods imports are at a record high in August, encouraged by the still healthy U.S. economy.

International:

The euro-zone manufacturing manager’s index fell to an 83-month low of 45.6 in September, down from 47 in August. The services PMI fell to an 8-month low of 52 in September, down from 53.5 in August. New orders for goods and services fell for the first time since January, dropping at the sharpest rate since June 2003.  The German manufacturing PMI fell to 41.4 in September from 43.5, the worst reading in more than a decade. The composite index registered 49.1 in September, down from 51.7 in August. Growth in German business activity was one of the weakest reading seen in over the past three years, recording an eighth month decrease in output and the steepest rate of decline since July 2012. In the manufacturing sector, the story remains of uncertainty about the economic outlook and a reduced appetite for investment. The automotive sector is a particular source of weakness for manufacturing. Lower demand from abroad is a key factor for both manufacturers and service providers. There were notable decreases in new export orders in the report.

Escalating trade tensions and a slowing economy have led the World Trade Organization to sharply downgrade their forecasts for trade growth in 2019 and 2020. World trade volumes are now expected to rise by only 1.2% in 2019, substantially sower than the 2.6% growth forecast in April. The projected increase for 2020 is 2.7% down from 3.0% previously. The economists at the WTO did note that downside risks remain high and the 2020 projection depends on a return to a more normal status in trade relations, Trade related indicators signal a worrying trajectory for world trade based on export orders and economic policy uncertainty. Due to the high uncertainty associated with forecasts under current conditions, the estimated growth for world trade in 2019 is placed in a range from 0.5% to 1.6%. Trade volumes could fall below this range if trade tensions continue to build, or outperform if they start to recede. The range for 2020 is even wider for 2020, ranging from 1.7% to 3.7%, with better outcomes depending on an easing of trade tensions.

Important Data Releases This Week

The September ISM manufacturing index will be released on Tuesday, October 1 at 10:00 AM EDT. Stalling growth has been this year’s signal from the ISM manufacturing index, which fell to 49.1 in August. New orders at 47.2 pointed to further weakness. We project a minor rise to 50 for September.

The September NFIB small business optimism index will be released on Tuesday, October 8 at 6:00 AM EDT. The index fell in August to 103.1, the lowest level since March on lower expectations for business conditions and sales growth. We see further erosion in September to 102.0.

September PPI will be released on Tuesday, October 8 at 8:30 AM EDT. Producer prices were mixed in August, with the headline index increasing 0.1% but the core heated up to 0.3%. For September, we see only a 0.1% increase for the headline and a 0.2% rise for the core index. This brings the headline index up 1.8% and the core up 2.3%.

August wholesale trade will be released on October 9, at 10:00 AM EDT. Wholesale inventories rose 0.2% in July and we expect a 0.4% rise in August.

September CPI will be released on October 10, at 8:30 AM EDT. The CPI rose0.1% in August and the core was up 0.3%. For September, we expect the headline number to rise 0.1% and the core up 0.2%. This brings the headline index up 1.8% y/y and the core up 2.4%.

September import and export prices will be released on Friday, October 11 at 8:30 AM EDT. Import prices fell 0.5% in August on lower petroleum prices. We expect a 0.1% decline for September. Export prices fell 0.6% on agricultural prices. Export prices will be unchanged in September.


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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.